Based on all the ratios below, which of the two companies is most liquid? Assume that both companies have approached you seeking a six-month (short-term) loan in the amount of 30% of the respective company’s current assets. You have but one loan to give. To which company do you grant the loan? Please discuss each ratio. COMPANY 1 (date from 2018 left and 2019 right column) 1. Current Ratio= Current Assets / Current Liabilities =1271900 / 1247742 =1.02 =1100433 / 1119631 =0.98 2. Quick Ratio= Current Assets- Inventory- Prepaid Expenses / Current Liabilities =(1271900 - 124809 -954183 ) / 1247742 =0.155 =(1100433 -115136- 752562) / 1119631 =020 3. Accounts receivable turnover =Net Credit Sales/ Average Debtors =6643051 / 58752 =113.07 =6084766 / 71649 =84.92 4. Average Days to collect= 365 / Accounts receivable turnover =365 / 113.07= 3.22 365 / 84.92= 4.29 5. Inventory Turnover= COGS / Average Inventory = 3868119 / 954183 =4.05 =3559158 / 752562 =4.73 6. Average Inventory Period= 365 / Inventory Turnover = 365 / 4.05= 90.12 365 / 4.73 = 77.16 COMPANY 2 A) Statement showing basic information from the above-given question: Sr No Particular Feb 3, 2017 Feb 3, 2018 Feb 3, 2019 Feb 3, 2020 1. Total Current Assets 1739385 1770532 1848082 2. Total Current Liabilities 1049235 933535 930820 3. Total Inventories 1520719 (1463561 + 57158)* 1463561 1528417 1465007 4. Cost of goods sold 4166411 4199718 4291520 4235978 5. Total Credit sales ( As per the information given in question total sales is credit sales ) 6257137 6261477 6356109 6203520 6. Accounts Receivables 29566 (38437-8871)* 38437 49853 46160 7. Average Receivables (Yr I receivable + Yr II receivables) /2 34001.5 44145 48006.5 8. Average Inventory (Yr I inventory + Yr II inventory) /2 1492140 1495989 1496712 * Using cash flow statement B) Statement showing Ratio calculation from the above-collected information from given question: Sr No Particular Feb 3, 2018 Feb 3, 2019 Feb 3, 2020 1. Working Capital = (Current Assets - Current Liabilities) From table A ( 1-2 ) 690150 836997 917262 2. Current Ratio = (Current Assets / Current Liabilities) From table A ( 1/2 ) 1.658 1.896 1.985 3. Quick Ratio = ( Current Assets - inventories)/Current Liability From table A [ (1-3)/2 ] 0.263 0.259 0.412 4. Accounts Receivable turnover Ratio = ( Net Credit sales / Average Accounts receivable ) From table A (5/7) 184.15 143.98 129.22 5. Avg Days to collect receivable Ratio = (365 / Avg Receivable turnover ratio) From table B ( 365 Days/4) 1.98 2.35 2.82 6. Inventory Turnover ratio = ( Cost of goods sold / Avg Inventory ) From table A ( 4/8) 2.815 2.869 2.830 7. Average Days to sell the inventories = (Inventory / Cost of sales)*365 days From table A (3/4)* 365 days 127.20 130.00 126.23

Based on all the ratios below, which of the two companies is most liquid? Assume that both companies have approached you seeking a six-month (short-term) loan in the amount of 30% of the respective company’s current assets. You have but one loan to give. To which company do you grant the loan? Please discuss each ratio. COMPANY 1 (date from 2018 left and 2019 right column) 1. Current Ratio= Current Assets / Current Liabilities =1271900 / 1247742 =1.02 =1100433 / 1119631 =0.98 2. Quick Ratio= Current Assets- Inventory- Prepaid Expenses / Current Liabilities =(1271900 - 124809 -954183 ) / 1247742 =0.155 =(1100433 -115136- 752562) / 1119631 =020 3. Accounts receivable turnover =Net Credit Sales/ Average Debtors =6643051 / 58752 =113.07 =6084766 / 71649 =84.92 4. Average Days to collect= 365 / Accounts receivable turnover =365 / 113.07= 3.22 365 / 84.92= 4.29 5. Inventory Turnover= COGS / Average Inventory = 3868119 / 954183 =4.05 =3559158 / 752562 =4.73 6. Average Inventory Period= 365 / Inventory Turnover = 365 / 4.05= 90.12 365 / 4.73 = 77.16 COMPANY 2 A) Statement showing basic information from the above-given question: Sr No Particular Feb 3, 2017 Feb 3, 2018 Feb 3, 2019 Feb 3, 2020 1. Total Current Assets 1739385 1770532 1848082 2. Total Current Liabilities 1049235 933535 930820 3. Total Inventories 1520719 (1463561 + 57158)* 1463561 1528417 1465007 4. Cost of goods sold 4166411 4199718 4291520 4235978 5. Total Credit sales ( As per the information given in question total sales is credit sales ) 6257137 6261477 6356109 6203520 6. Accounts Receivables 29566 (38437-8871)* 38437 49853 46160 7. Average Receivables (Yr I receivable + Yr II receivables) /2 34001.5 44145 48006.5 8. Average Inventory (Yr I inventory + Yr II inventory) /2 1492140 1495989 1496712 * Using cash flow statement B) Statement showing Ratio calculation from the above-collected information from given question: Sr No Particular Feb 3, 2018 Feb 3, 2019 Feb 3, 2020 1. Working Capital = (Current Assets - Current Liabilities) From table A ( 1-2 ) 690150 836997 917262 2. Current Ratio = (Current Assets / Current Liabilities) From table A ( 1/2 ) 1.658 1.896 1.985 3. Quick Ratio = ( Current Assets - inventories)/Current Liability From table A [ (1-3)/2 ] 0.263 0.259 0.412 4. Accounts Receivable turnover Ratio = ( Net Credit sales / Average Accounts receivable ) From table A (5/7) 184.15 143.98 129.22 5. Avg Days to collect receivable Ratio = (365 / Avg Receivable turnover ratio) From table B ( 365 Days/4) 1.98 2.35 2.82 6. Inventory Turnover ratio = ( Cost of goods sold / Avg Inventory ) From table A ( 4/8) 2.815 2.869 2.830 7. Average Days to sell the inventories = (Inventory / Cost of sales)365 days From table A (3/4) 365 days 127.20 130.00 126.23

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter12: Fainancial Statement Analysis

Section: Chapter Questions

Problem 92PSA: A Preparation of Ratios Refer to the financial statements for Burch Industries in Problem 12-89A and...

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Question

Based on all the ratios below, which of the two companies is most liquid? Assume that both companies have approached you seeking a six-month (short-term) loan in the amount of 30% of the respective company’s current assets. You have but one loan to give. To which company do you grant the loan? Please discuss each ratio.

COMPANY 1 (date from 2018 left and 2019 right column)


1. Current Ratio= Current Assets / Current Liabilities	=1271900 / 1247742 =1.02	=1100433 / 1119631 =0.98
2. Quick Ratio= Current Assets- Inventory- Prepaid Expenses / Current Liabilities	=(1271900 - 124809 -954183 ) / 1247742 =0.155	=(1100433 -115136- 752562) / 1119631 =020
3. Accounts receivable turnover =Net Credit Sales/ Average Debtors	=6643051 / 58752 =113.07	=6084766 / 71649 =84.92
4. Average Days to collect= 365 / Accounts receivable turnover	=365 / 113.07= 3.22	365 / 84.92= 4.29
5. Inventory Turnover= COGS / Average Inventory	= 3868119 / 954183 =4.05	=3559158 / 752562 =4.73
6. Average Inventory Period= 365 / Inventory Turnover	= 365 / 4.05= 90.12	365 / 4.73 = 77.16

COMPANY 2

A) Statement showing basic information from the above-given question:

Sr No	Particular	Feb 3, 2017	Feb 3, 2018	Feb 3, 2019	Feb 3, 2020
1.	Total Current Assets		1739385	1770532	1848082
2.	Total Current Liabilities		1049235	933535	930820
3.	Total Inventories	1520719 (1463561 + 57158)*	1463561	1528417	1465007
4.	Cost of goods sold	4166411	4199718	4291520	4235978
5.	Total Credit sales ( As per the information given in question total sales is credit sales )	6257137	6261477	6356109	6203520
6.	Accounts Receivables	29566 (38437-8871)*	38437	49853	46160
7.	Average Receivables (Yr I receivable + Yr II receivables) /2		34001.5	44145	48006.5
8.	Average Inventory (Yr I inventory + Yr II inventory) /2		1492140	1495989	1496712

* Using cash flow statement

B) Statement showing Ratio calculation from the above-collected information from given question:

Sr No	Particular	Feb 3, 2018	Feb 3, 2019	Feb 3, 2020
1.	Working Capital = (Current Assets - Current Liabilities) From table A ( 1-2 )	690150	836997	917262
2.	Current Ratio = (Current Assets / Current Liabilities) From table A ( 1/2 )	1.658	1.896	1.985
3.	Quick Ratio = ( Current Assets - inventories)/Current Liability From table A [ (1-3)/2 ]	0.263	0.259	0.412
4.	Accounts Receivable turnover Ratio = ( Net Credit sales / Average Accounts receivable ) From table A (5/7)	184.15	143.98	129.22
5.	Avg Days to collect receivable Ratio = (365 / Avg Receivable turnover ratio) From table B ( 365 Days/4)	1.98	2.35	2.82
6.	Inventory Turnover ratio = ( Cost of goods sold / Avg Inventory ) From table A ( 4/8)	2.815	2.869	2.830
7.	Average Days to sell the inventories = (Inventory / Cost of sales)365 days From table A (3/4) 365 days	127.20	130.00	126.23

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